Mega-hopes

Builders Jump Into Luxury Market Without Buyers In Hand

January 12, 1997|By Anita Sharpe, Wall Street Journal.

A handful of luxury-home builders are adopting a new credo: If they build $10 million mansions, the wealthy will come.

In Beverly Hills, Calif., builder Alvin M. Weintraub is completing a $12 million, "Mediterranean-style" mansion on speculation. In Delray Beach, Fla., Frank McKinney is constructing on spec an $11.9 million ocean-front French-style chateau that contains a replica of the White House's Oval Office. And in Pebble Beach, Calif., an unidentified entrepreneur has just agreed to buy but hasn't closed on a $9.4 million ocean-view estate finished this year, reports local agent Ruth LaGrange.

Houses built on speculation -- that is, without a guaranteed buyer -- have long been common in suburban subdivisions. In the booming market of the 1980s, builders broke the $1 million barrier for spec mansions.

But most people who can afford houses as expensive as $10 million prefer to buy historic mansions with famous former owners and charming features -- or to commission more personalized monuments.

Now, however, some builders are convinced they can break the $10 million barrier. Thanks to the Asian economic boom, a bullish stock market and the rejuvenated merger climate, more people are amassing huge fortunes while still in the prime of their careers. McKinney, the Delray Beach builder, believes that these executives are too busy to scout lots and then oversee two years of construction. They "can't spend it as fast as they're making it," he argues.

Besides, some of these spec mansions offer something else for the nouveau riche: They come fully equipped. "My houses are furnished down to the gold-plated toothbrush, the Jet Ski on the dock and CDs in the CD player," says McKinney. His spec mansion is a 27-room, 23,000-square-foot castle that features a 4,500-square-foot master bedroom with an indoor atrium and waterfall. The house also has a Jacuzzi 10 feet in diameter and a movie theater, complete with popcorn machine, that seats 12 people on overstuffed leather sofas.

Some wealthy homeowners say they'd consider buying an expensive spec mansion -- if it were in the right location. Donald Trump says he would "absolutely consider spec" if he were shopping for a new home in south Florida. "But for that kind of money, I'd want to be in Palm Beach" instead of the Delray Beach area, he adds.

Of course Trump, a developer of high-end real estate himself, may be just a bit biased. Indeed, there is one problem: None of these $10-million-plus mansions has sold yet. "Anybody who does a ($10 million) spec home is crazy. They don't understand the market," says developer Mark Pulte. He has built and sold four spec mansions between Palm Beach and Boca Raton in the past five years, but they were all around $5 million.

To purchase, furnish and maintain a $10 million home, real-estate experts say, a buyer would probably need a net worth of at least $100 million. That limits the potential pool of U.S. buyers to only about 2,500 households, "a pretty rarefied stratosphere," acknowledges Los Angeles-area builder Rick Hilton, whose firm is building pricey spec mansions -- including, possibly, a $10 million home -- in its 13-lot Brentwood Country Estates subdivision.

Rich buyers who can easily afford $5 million spec homes still shrink from paying twice as much, even for amenities like ballrooms, parking for dozens of cars and art galleries, say some builders and real estate agents. Even custom-built homes and resales in the wealthiest parts of south Florida and California usually sell for only several million dollars.

And while developers in the 1980s -- when the stock market also was soaring -- tried to establish a market in expensive spec mansions, those homes mostly sold for prices well below those of today's houses. By the mid-1980s, spec estates costing $5 million or more began sprouting around Beverly Hills. Similarly, the oil boom fueled a flurry of multimillion-dollar spec mansions in the Dallas area. Around Greenwich, Conn., developers were building $3 million spec mansions in the mid-1980s, recalls real estate agent Judy Borkowsky. "When the (1987 stock market) crash hit, a lot of builders went under," she says. These days, however, thanks to Wall Street's resurgence, builders have returned to the Greenwich spec market, erecting mansions in the $3 million to $6 million range, she says.

Realtors believe the top spec-home sale was a Palm Beach mansion that builder Robert Gottfried sold in 1991 for $9 million. The buyers, entrepreneurs Michael and Penny North, have since moved and are now trying to sell the place for $12 million.